With Ratepayer Subsidies for New Plants Revealed, Many Critics are Outraged

When the state finally released the subsidies that ratepayers would fork over to power plant developers, the expectation was that it might quell the bitter controversy over the pilot program, which proponents argued would lead to lower energy bills for consumers and businesses.

Not surprisingly, that view triggered widely varied responses from critics of the program, some of whom continue to challenge it in federal courts.

"It's like highway robbery," said Paul Fremont, an energy analyst for Jefferies & Co., when asked about the ratepayers' subsidies. "Were they wearing masks?"

New Jersey Division of Rate Counsel Stefanie Brand argued otherwise. "Yes, there is a payment that will be made," she said. "We predicted that, in the end, we would save a lot more than we spend. It looks like that appears to be true."

Ratepayers will end up paying more than $40 million to the Competitive Power Ventures power plant in Woodbridge and Hess Corp.'s new generating facility in Newark -- in the first year of a 15-year contract in which subsidies will steadily rise, particularly in the case of CPV.

Indeed, in the case of payments guaranteed to CPV, the Maryland-based company is guaranteed $286.03 per megawatt hour for providing capacity, the reserve needed to keep the lights on for customers served by the regional power grid, the PJM Interconnection. That is well above the record $248 per megawatt hour that power suppliers were paid a couple of years ago to provide capacity.

Power companies receive two payments for the electricity they produce—one for the actual energy the units produce and the other for providing reserve capacity.

In recent years because of congestion on the power grid and few new generating units being developed, the price of providing that capacity has soared, costing consumers more than $1 billion a year in New Jersey. That's why the Christie administration and Legislature backed a plan to hand out ratepayer subsidies to developers to build new power plants.

Brand and a CPV executive contended that despite those payments, ratepayers will see drops in their electric bills. It already happened in an auction held earlier this month, when the capacity price for northern New Jersey dropped from $225 per megawatt last year to $167.46, Brand noted.

Industry executives and Wall Street analysts, however, questioned how much of a drop in prices resulted from the New Jersey pilot program. New transmission upgrades underway in the state are expected to save customers $200 million when the new line is operational, expected to occur also in 2015, they said. They also noted prices dropped for northern New Jersey but rose for the rest of the state, including the area served by the CPV plant.

Brand conceded that not all the dip by $58 in capacity prices resulted from the construction of the new plant. If only $5.50 of that came about by the construction of the two new plants, ratepayers would be held harmless by the subsidies, Brand said.

Braith Kelly, a senior vice president of CPV, said ratepayers would gain from the construction of his company's 663-megawatt plant. He argued the new plant will save ratepayers $191 million in its first year, $151 million in lower capacity payments.

"The capacity system is broken; the only ones defending it are those who those who benefit from it because they have the only apple cart in the market," Kelly said, a reference to power suppliers ability to keep new players out of the electricity markets, a view shared by state officials.

"This is not a ratepayer subsidy; it's a ratepayer rebate," Kelly said. "For the first time since deregulation hit, ratepayers are benefitting."

Industry executives and others called that argument nonsensical. In a research note to clients, Fremont said, "There is no basis for savings estimate provided by the company."

Brand countered that analysts are more concerned with protecting shareholder rates of return than what happens to ratepayers.

Over the life of the CPV contract, ratepayers may end up paying between $700 million and $1.3 billion, according to Glen Thomas, head of the P3 Providers Group, a coalition of energy suppliers.

"The ratepayers of New Jersey should be outraged," Thomas said. "They are being asked to foot the bill for power plants that are not needed and, in CPV's case priced outrageously above what customers would otherwise pay."

Thomas said the New Jersey Board of Public Utilities needs to answer why there is such a disparity between the payments CPV will receive, which escalate to $432.65 per megawatt hour in the final year of the contract, and that which Hess will get, which tops out at $260.

The BPU declined to comment because of ongoing litigation, according to Greg Reinert, a spokesman for the agency.

The contract payments also poke a big hole in predictions made by former BPU President Lee Solomon who said he believed ratepayers would end up paying no subsidies. "There's a reasonable likelihood they will be able to clear without any subsidy," Solomon said at a NJ Spotlight roundtable forum on developing new power plants in New Jersey last July.

The controversy over the subsidies has put the state's most dominant energy company on the sidelines. PSEG Power talked about building a new plant in Seawaren for several months, but never bid in the recent capacity auction.

"We believe a power plant could have been built without a subsidy," said Kathy Fitzgerald, vice president of communications for Public Service Enterprise Group, the company's parent. "The subsidies that have been introduced insert too much uncertainty into the market and made the investments too risky," she said.